CINERAMAS Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) THE assessee who carries on business in exhibition of films is a member of the East Punjab Motion Pictures Association. Under the bye-laws of the association, a member is obliged to carry out the "award and directives" of the association arising out of all disputes between members or upon complaints received by the association. A member failing to carry out the directive of the association would be suspended from membership of the association and would be eligible to be reinstated on payment of a specified sum of penalty in addition to " reinstatement circulation charges ". The assessee had to pay a sum of Rs. 4,300 by way of penalty to the association during the accounting year relevant to the assessment year 1970-71. The assessee claimed that the sum of Rs. 4,300 paid by way of penalty to the association was a sum " laid out wholly and exclusively for the purposes of the assessee's business " and was, therefore, allowable expenditure under Section 37 of the Income-tax Act, 1961. The Tribunal held that breaches of contractual obligations were not incidents of business and, therefore, the amount paid by the assessee as penalty was not allowable expenditure.

(2.) AT the instance of the assessee, the following question has been referred to us for our opinion :

(3.) IN Mask and Co. v. Commissioner of Income-tax [1943] 11 ITR 454 (Mad), the assessee committed a breach of contract and in a suit filed by the other party, he was obliged to pay a sum of Rs. 5,000 by way of damages. The amount was claimed by the assessee as expenditure " laid out or expended wholly and exclusively for purposes of the assessee's business ". Negativing the assessee's claim, Leach C. J. and Lakshmana Rao J. , after referring to Inland Revenue Commissioners v. E. C. Warnes and Co. (1919] 12 TC 227 (KB) and Inland Revenue Commissioners v. Alexander von Glehn and Co. [1920] 12 TC 232 (CA), said--See [1943] 11 ITR 454, 462 (Mad): " In the present case, the assessee was not fined for a breach of law, but was made to pay damages for a breach of the contract entered into. The assessee's action in disregarding the undertaking given was palpably dishonest and we are of the opinion that the award of damages which followed did not constitute an expenditure falling within Section 10 (2) (xii ). It was not incidental to the trade. "